Are debt charities really impartial?
I have always been an ardent supporter of debt advice charities. But in light of two cases that I recently came across, I am beginning to have second thoughts.
In both cases, the debtors sought help from debt charities as they were eligible to propose a debt relief order.
The criteria for this includes having unsecured debts of under £15,000, assets below £300 and no more than £50 per month left after paying for normal living expenses.
The first case was that of Fred McCarthy, a respected 73-year-old ex-serviceman who was struggling to pay £8,500 of credit card debts.
Fred was told by his local Citizens Advice Bureau that he could propose a debt relief order. On its recommendation, he contacted various debt charities, which all told he wasn’t actually eligible because he had too much money left over each month.
Instead, he was told he needed to take out a debt management plan.
Thankfully, Fred finally managed to get a debt relief order, but it was not without a struggle.
The second case concerned Leon Fallas, who is 38, registered blind and has credit card debts of around £3,000. He experienced similar problems to Fred and I am now working with him to ensure he gets the debt relief order he so desperately needs.
Both these cases highlight the sometimes inconsistent and confusing guidance provided by different debt advisers, whether a charitable organisation or not.
Both men claim they were steered away from the debt relief order towards a debt management plan.
So what’s wrong? The fact that less than 12,000 debt relief orders have been proposed since their inception in April 2009 suggests a reluctance across the industry to process these.
I suspect the low £90 fee that is charged to the borrower to administer a debt relief order could be to blame. A debt firm earns the first £10 as their fee, with the remainder going to the Insolvency Service.
In contrast, debt management plans can earn a firm hundreds of pounds. So where is the incentive for a debt advice firm, charitable status or not, to propose a debt relief order instead of a debt management plan?
Most people believe that the debt charities are impartial, but are they really?
Your answer must surely depend on your interpretation of ‘impartial’. In my book it means: neutral; unbiased; independent; balanced; and (importantly) detached.
The question is: can a firm funded by creditors and sponsored by creditors be impartial?
I believe that not-for-profit debt agencies serve an important purpose but I wonder how many other desperate and vulnerable people have experienced the same treatment and will continue to do so until this area is more closely controlled.
Generally speaking, insolvency is to businesses what bankruptcy is to individuals. A company is insolvent if the value of its assets is less than the amount of its liabilities, or it is unable to pay its liabilities (loan payments) as they fall due. It’s an offence for an insolvent company to keep trading, so the main options available to an insolvent company are: voluntary liquidation, compulsory liquidation, administration or a company voluntary arrangement.
Debt management plan
Not to be confused with a consolidation loan or bankruptcy, a DMP is a service offered by a specialist debt management company that will negotiate with your creditors to change the terms of how they get their money back. The debt company will renegotiate your debt repayment terms and then deal directly with your creditors on your behalf, and you then pay the debt management company, which passes the money to your creditors minus its initial and subsequent monthly fee. This can be as high as 20%, which means you’ll pay down your debts slower than you thought.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.